Friday, October 5, 2012

1. This is from Bob Murphy, criticizing Krugman for dismissing the lessons of the American downturn but not the British. I think I should have come up earlier in the discussion... like, after him and Tom Woods. I do not know as much about the British case, but I do know that in 1923 Keynes was quite comfortable with recent Fed policy and not comfortable with recent BOE policy, and the reason was the point and other European currencies were more overvalued after the war than the dollar. This does not seem like an irrelevant fact in sorting all this out. Krugman is not the first guy to differentiate between the two cases.

2. This is from LK, and it discusses open market operations in the early 20s. Remember this is a somewhat new approach. Before then, the Fed relied mainly on the discount rate which is the rate that it charges banks. After this point, it relied more exclusively on open market operations, which influence the federal funds rate, which is the rate that banks charge each other. LK's conclusion (and I agree) is that the Fed caused the 1920-21 recession to end the war-time inflation, and then the Fed ended the 1920-21 recession by taking its boot off the economy's neck. The whole affair was somewhat haphazard, of course.

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One of the things that I said in the RAE paper was that a profitable project for an Austrian would be to try to actually chart out changes in the capital structure associated with war-time monetary policy. Is this even in the cards? Will anyone take up that task? One would also think that you'd want to see a turn in the cycle emerging from the realization of entrepreneurs (particularly at the long end of the capital structure) that they don't have the resources that they thought they did. The former might be possible, but the latter seems very challenging to me in light of what we know what caused the break in inflation and the descent into depression. Any takers?

11 comments:

Regarding the timing of open market operations during the 1920-21 downturn, the recovery began in mid 1921. But open market operations didn't begin in earnest till January 1922, with the bulk of purchases in February and March. Open market operations weren't a widow's cruse. Also, you note that OMOs affect the federal funds rate, but there wasn't much of a federal funds market in 1921.

Right - didn't mean to confuse. The primary policy instrument at this time was definitely the discount rate.

A little context probably would have been helpful - a little while back Bob was asking whether or not the Fed response to the Depression as "unprecedented". This is one of a couple of posts LK has had since then about uses of OMOs during the 20s.

The switch to OMOs as the primary policy instrument emerged in part as a result of the Fed's experiences with the discount rate in 1920-21.

It was a rather typical post war recovery. Inflation fell because warring parties returned to agricultural production, industrial production shifted from war to consumer goods, and rebuilding investment began. Demobilization freed up a lot of resources from war for peacetime use. The Fed followed along.

I think I should have come up earlier in the discussion... like, after him and Tom Woods.

Wow, no wonder you look up to Krugman--you guys have comparable egos. Daniel, the point of the post to rip Krugman's hypocrisy, not to give a history of thought on commentary on 1920-21. In my Mises Academy class I pointed people to your RAE paper.

If the real dispute is what Krugman said about the IMF report, and if, as you acknowledge, you don't know much about the British case, then why would you expect Bob to mention you at all, let alone to do so more prominently?

If I had known you'd care so much about simply referencing one of the more prominent responses at the time that was actually directed at Bob and Tom Woods (unlike Krugman's) I would not have even included that sentence. Why are you making such a big deal over such a reasonable point?